Steve Hodgetts advises charities to continue claiming back VAT charges on investment costs, despite recent challenges from the HMRC.

Following the High Court case of the Church of England Children’s Society in 2005, it was generally accepted that VAT incurred on fundraising costs could be treated as residual and recoverable under the apportionment methods applicable to the charity. This included fund management costs where the purpose was to raise general funds to be used in furthering the objectives of the charity (which included the making of taxable supplies). A number of charities submitted claims for retrospective VAT as a result of this case and received payment from HMRC, including agreement that the treatment is appropriate.

However, more recently, HMRC has started to challenge this position and deny recovery, although this has not been a blanket change of policy and challenges have been on a discreet basis. As a result it is understood that some charities have ceased to treat the VAT on such costs as residual, to avoid an assessment from HMRC. This is clearly inequitable and needed to be addressed.

A recent tribunal decision has been released in respect of the Chancellor, Masters and Scholars of the University of Cambridge (Cambridge University) which should provide clarity. The first tier tribunal determined that there was clearly a link between the investment activity and the overall economic activity, and did not accept that overheads relating to the investment activity should be restricted [in full] because the activity may technically be an exempt supply for VAT purposes.

This is good news for charities and confirms the findings of the Children’s Society case, but HMRC now has to consider whether to accept the decision or appeal to the upper tribunal. In the meantime, if you have not been treating the VAT incurred on investment management fees as residual, you may want to consider a protective claim.

Steve Hodgetts is VAT partner at Baker Tilly